TODAY’S S&P 500 SET-UP – October 14, 2014

As we look at today's setup for the S&P 500, the range is 88 points or 1.37% downside to 1849 and 3.32% upside to 1937.                                                          













  • YIELD CURVE: 1.81 from 1.86
  • VIX closed at 24.64 1 day percent change of 16.01%


MACRO DATA POINTS (Bloomberg Estimates):

  • 7:45am: ICSC weekly sales
  • 8:30am: NFIB Small Business Optimism, Sept, est 95.8 (pr 96.1)
  • 8:55am: Redbook weekly sales
  • 11am: U.S. to announce plans to auction of 4W bills
  • 11:30am: U.S. to sell $24b 3M bills, $27b 6M bills
  • 4:30pm: API weekly oil inventories



    • Senate, House out of session
    • Supreme Court may release list of cases it plans to consider
    • Sec. of State John Kerry meets with Russian Foreign Minister Sergei Lavrov in Paris
    • Obama at meeting with >20 foreign defense chiefs/ Joint Chiefs of Staff Chairman Martin Dempsey at Andrews
    • 9am: Mexican Secretary of Economy Ildefonso Guajardo speaks at Woodrow Wilson Center
    • 9:30am: Kaiser Family Foundation releases 50-state Medicaid budget survey, holds briefing
    • U.S. ELECTION WRAP: Debates in Ky, Ark; Ebola; SD Polls, Ads



  • JPMorgan 3Q Profit Misses, Rev Beats; Down 1% Pre-Mkt
  • Too-Big-to-Fail Banks Face Capital Gap of Up to $870b
  • Repo Traders Face FSB Collateral Rule in Shadow Bank Crackdown
  • Google Expands U.S. Shopping Service in Challenge to
  • BlackRock Confident on 5% Growth Target on Shift From Cash
  • EMC Acquiring Cloud Startup Cloudscaling to Boost Storage Sales
  • Billionaire Niel’s Iliad Surges After Dropping T-Mobile US Bid
  • Scrapped Deals at 6-Yr High as Iliad Walks Away From T-Mobile
  • Gazprom 2Q Profit Rises Less Than Forecast; Revenue Increases
  • SABMiller Sales Trail Estimates Amid Weaker Volumes in Asia
  • Chevron Delays $12b Deep Water Drilling Project: Jakarta Post
  • Samsung Electronics to Make Facebook Exclusive Phone: Daily
  • Apple Won’t Introduce Retina Macbook Air on Oct. 16: Re/code
  • Bumble Bee Said to Attract Bids From Thai Union, Mitsubishi
  • CVC Said to Near Accord to Buy Finnish Insulation Maker Paroc
  • Oil Demand Growth This Year Seen Weakest Since 2009 by IEA
  • German Investor Confidence Falls as Growth Prospects Weaken



    • Citigroup (C) 8am, $1.12 - Preview
    • Domino’s Pizza (DPZ) 7:30am, $0.61
    • JB Hunt (JBHT), 8:30am, $0.84 (tentative)
    • Johnson & Johnson (JNJ) 7:45am, $1.44 - Preview
    • Wells Fargo (WFC) 8am, $1.02 - Preview
    • Wolverine World Wide (WWW) 6:30am, $0.59



    • Bank of the Ozarks (OZRK) 5pm, $0.39
    • CSX (CSX) 4:01pm, $0.48
    • Intel (INTC) 4:01pm, $0.65 - Preview
    • Linear Technology (LLTC) 5:01pm, $0.59



  • WTI Extends Drop From 22-Month Low as Demand Slows; Brent Falls
  • Oil Demand Growth This Year Seen Weakest Since 2009 (Correct)
  • Giant Battery Unit Aims at Wind Storage Holy Grail: Commodities
  • Rice Crop Seen Shrinking by FAO on Weather, End of Thai Subsidy
  • Tin’s Price Tumble Seen Slashing Shipments From Indonesia by 30%
  • Cocoa Rebounds After Drop Yesterday; Arabica Coffee Also Gains
  • Gold Trades Near 4-Week High as Investors Weigh Oil to Economy
  • Gold Rises Near 4-Week High as Investors Weigh Economy to Oil
  • Copper Users in Europe Likely to Seek Lower Premiums: Macquarie
  • Rubber Growers Agree to Avoid Selling at Low Prices: IRCo
  • Indian Steel Demand Said to Expand at Slowest Pace in Decade
  • Rubber Climbs Most Since May After Top Producers Price Pledge
  • Thai Gold Exchange May Offer Kilobar Trade Next Year, Jitti Says
  • Rebar Falls Most in 2 Weeks as Exports Surge Amid Overcapacity


























The Hedgeye Macro Team


















Tech Bubble?

This note was originally published at 8am on September 30, 2014 for Hedgeye subscribers.

“This is the real world, homie, school finished.”

-Kanye West


That’s the opening quote to the latest business book I have cracked open, The Hard Thing About Hard Things, by Ben Horowitz (of Andreessen Horowitz fame).


Unlike most of the #behavioral and #history books I’ve been citing throughout the year, this one has a much more #bubbly feel to it. I’m only four chapters in but, suffice it to say, I don’t agree with some of Horowitz’ business building and leadership principles.


Maybe it’s because his parents were communists. Maybe it’s because I’m a knucklehead athlete. I’m not sure. I’m just certain that all of the techie “valley” culture and the Keynesian Economics school stuff isn’t playing out according to plan, in the real world.

Tech Bubble? - Bubble bear cartoon 09.26.2014


Back to the Global Macro Grind


Another one of the 2014 Tech Bubble’s “he’s got mad dough, bro” darlings who is selling his book these days (Peter Thiel) made headlines yesterday in telling Fox Business anchor Deidre Bolton that it wasn’t, well, a Tech Bubble.


Thiel, who blew up his hedge fund, multiple times (buying stocks in 2008, shorting them in 2009, etc.) is as academically intelligent as I can be hockey-head dumb, went on to say that it’s not a bubble in stocks because there is a bubble in bonds.


To be specific, Thiel said “I’m investing in Tech stocks to hide from the government bond bubble.” “So”, I replied (in tweet terms to @peterthiel) “I’m hiding in the Long Bond so that I can be short the Tech Bubble.” #timestamped


Got #Bubbles?


We do. On our Q4 Macro Themes Call we have a whole slide deck full of these suckers. If you’d like to be educated on some #history and #context of the current components of the US stock market bubble, please join us this Thursday at 1PM EST.


While there is plenty of low-quality junk debt in this world that we would consider #bubbly, the upside to fully understanding how all of this might end (Japanese style) is that the mother of all bubbles (Japanese Government Bonds) has been inflating for decades.


While I’m not sure if Thiel joined the ranks of the many who have a higher IQ than I and shorted Japan’s debt because the country’s Keynesian Abenomics experiment was going to fail, the only failure in the real world was not being long those bonds.


Homies, here’s the point:


  1. In the face of failing economic policies, Japan, Europe, and USA have only one option – moarrr #cowbell
  2. As these central planners attempt to artificially inflate economies, they simply inflate asset prices
  3. As asset prices (Tech Bubbles) inflate, so does the cost of living associated with those assets (CA real estate)
  4. As the cost of living rises to pain thresholds consumers cannot overcome, the economy surprises on the downside
  5. Then, central planners respond with moarrr #cowbell


I’m sure Kanye West can come up with a song that’s more clever than what this really is. But I’m pretty sure that the 60% of Americans who have negative real wage growth (read: falling purchasing power) since the Fed engaged with its Policy To Inflate get it.


So do the Japanese. Here’s the latest on that Eastern front:


  1. Japanese Real Wages -2.6% year-over-year in August (vs. -1.6% y/y in July)
  2. Japanese Household Spending -4.7% year-over-year in August (vs. -5.9% in July)


In Mucker rapper terms, that is called getting train wrecked.


Oh, and if you aren’t into Burning Yens and Euros, there’s this other devaluation story to update you on this morning – Russia:


  1. The Russian Ruble dropped -14% in the last 3 months (versus a basket of Dollars and Euros)
  2. The Russian Trading System Index (its stock market) is crashing, -19.1% YTD
  3. And the Ruskies are going to now “defend” their currency by raising interest rates!


As it has, across centuries, this is how the Keynesian School of QE and/or Currency Devaluation ends – epically. I’ll have no problem shorting Treasuries (our call for all of last year) when our research and risk management signals tell me to do so.


But, in the meantime, I’ll stay long of Long-Term Treasuries (via TLT, which has a total return of +17.1% YTD) and short of small cap illiquidity and social tech bubbles via anything that is getting smoked in TAM terms right now.


While the over 40% of IPO’s that are crashing (down 20% or more from peak) aren’t all techie related, both in # of issues and in market cap terms, the froth of this #Bubble in US growth expectations is as big as when Horowitz’s first company almost went bankrupt.


Our immediate-term Global Macro Risk Ranges are now:


UST 10yr Yield 2.46-2.56%

SPX 1962-1987

RUT 1097-1132

VIX 13.81-16.75

EUR/USD 1.26-1.29

WTI Oil 91.69-94.98


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Tech Bubble? - 09.30.14 10Yr vs. case shiller san fran

Japan, Europe and the U.S. Slowing

Client Talking Points


Japan is evidently not enjoying the other side of the USD/YEN correlation risk (Yen up, Nikkei down another -2.4% overnight to -7% year-to-date) – when you have neither economic growth nor a devaluation policy to inflate markets that are working, it gets tougher to convince people what is “cheap”.


Horrendous German ZEW for OCT would lead you to believe the Germans don’t trust the French/Italian monetization dressing; Draghi’s Policy To Inflate only resulted in #deflation across the entire Eurozone in reported CPI terms this morning too (France CPI -0.4% y/y SEP vs -0.3% AUG).


UST 10YR Yield smashed to 2.21% this morning, so you can book some gains on the Long Bond (TLT) as capitulation is #on for Treasury Bond bears; Russell 2000 and UST 10Yr Yield continue to signal U.S. #GrowthSlowing in 2H14 vs the Q2 “bounce”.

Asset Allocation


Top Long Ideas

Company Ticker Sector Duration

The Vanguard Extended Duration Treasury (EDV) is an extended duration ETF (20-30yr). Now that we have our first set of late-cycle economic indicators slowing in rate of change terms (ADP numbers and the NFP number), it's time to really think through the upcoming moves of this bond market. We are doubling down on our biggest macro call of 2014 - that U.S. growth would slow and bond yields fall in kind.


Fixed income continues to be our favorite asset class, so it should come as no surprise to see us rotate into the Shares 20+ Year Treasury Bond Fund (TLT) on the long side. In conjunction with our #Q3Slowing macro theme, we think the slope of domestic economic growth is poised to roll over here in the third quarter. In the context of what may be flat-to-decelerating reported inflation, we think the performance divergence between Treasuries, stocks and commodities may actually be set to widen over the next two to three months. This view remains counter to consensus expectations, which is additive to our already-high conviction level in this position.  Fade consensus on bonds – especially as growth slows. As it’s done for multiple generations, the 10Y Treasury Yield continues to track the slope of domestic economic growth like a glove.



Restoration Hardware remains our Retail Team’s highest-conviction long idea. We think that most parts of the thesis are at least acknowledged by the market (category growth, real estate expansion), but people are absolutely missing how all the pieces are coming together to drive such outsized earnings growth over an extremely long duration. The punchline of our real estate analysis is that a) RH stores could get far bigger than even the RH bulls seem to think, b) Aside from reconfiguring 66 existing markets, there’s another 19 markets we identified where the spending rate on home furnishings by people making over $100k in income suggests that RH should expand to these markets with Design Galleries, and c) the availability and economics on large properties for all these markets are far better than people think. The consensus is looking for long-term earnings growth of 28% -- we’re looking for 45%.  

Three for the Road


Oil price slump yet to hit US shale oil production: IEA chief



In the middle of every difficulty lies opportunity.

-Albert Einstein


In China, Thailand, Germany and Egypt income inequality was about the same in 2000 as it had been in 1820.

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October 14, 2014

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October 14, 2014 - Slide10

#Nice Behavior

“It would be nice to think that such bad behavior will never happen again.”

-Daniel Alpert


Some people are nice in this business. Some people are mean. I tend to be nice to subscribers, children, and dogs. I guess I have a not so nice tweet-streak in me for pundits who aren’t accountable. Hockey players can be mean that way.


The aforementioned quote comes from a non-hockey-non-consensus economics book I have been waiting to review called The Age of Oversupply, by Dan Alpert from Westwood Capital. It’s an outside the box, but reasonable way to consider #deflation.


Dan is one of the nice guys who holds himself accountable to his clients. He is also on a short list of people who were appropriately bearish on things like supply in 2008. The main contention in his book is that oversupply is here to stay. That appears right, for now.


Back to the Global Macro Grind


Some of the #MoBros on Twitter have been calling me a meany for calling their levered-long-momentum positions in small cap and/or social (non profit publicly listed companies) stocks #Bubbles. But Dan is down with that – he calls them what they are too.


The Great Credit Bubble may have burst, but the age of oversupply hasn’t ended – and won’t anytime soon. Abundant labor, excess capital, and cheap money are here to stay.” (The Age of Oversupply, pg 18)


By my math, the only way to unwind the excess and stupid-valuation-storytelling associated with these cheap moneys is via lower prices for #bubble stocks. Yesterday’s US stock market volume was revealing on that front:


  1. Total US Equity Market Volume (total exchange + OTC + OTCBB) was +6.2% vs. its 3 month average
  2. Total Exchange Volume was +44% vs. its 3 month average
  3. Total Traded Value (Russell 3000) was +30% vs. its 4 month average


That’s three different ways we try to look at equity market volume in real-time. When it comes to the pick-toggling junk bond #bubble, finding real-time volume read-throughs is more like finding Waldo.


Today’s Chart of The Day (exhibit 51 in our Q4 Macro Themes deck) is a picture of what I am trying to hammer home in terms of the relationship volume has with inflated prices – Total Exchange Volume vs Russell 3000 TTM P/E multiple.


Punch-line: this is the most expensive and illiquid market since the caveman.


“So” how does expensive illiquidity sync with oversupply of labor, capital, etc.? Unfortunately, when Japanese, European, and US growth is slowing (all at the same time), I think what that means is pretty straightforward:


  1. Deflation of illiquid equity bubbles
  2. Re-flation of premiums paid for liquidity (JGBs, Bunds, Treasuries)
  3. And a whole whack of revisionist sell-side economics excuse-making along the way


You see, until this market snapped the backs of the Moving Monkeys (point and click single-factor time/price charts using things like the “50 and 200 day” moving averages), they didn’t have to pay attention to things like books, volume, or volatility.


After a +138% rip in US equity volatility (VIX since the Russell #Bubble topped on July 7th, 2014), they need to start reading!


To be clear on timing, since we’re now probing:


A)     Immediate-term TRADE overbought signals in VIX (risk range = 17.78-24.98)

B)      Immediate-term TRADE oversold signals in SPX and RUT (SPX risk range = 1)


I don’t want you to be shorting US stocks and buying TLT with the 10yr Yield at its YTD lows (2.21%) today.


I just want you to, objectively, rewind the risk management tapes and learn something from what a baseline 3-factor model (price, volume, and volatility) was signaling for, well, most of 2014.


For OCT to-date, the #Quad4 deflation in US equity sector styles levered to inflation and/or growth expectations looks like this:


  1. Energy Stocks (XLE) down -10.65%
  2. Basic Material Stocks (XLB) down -9.03%
  3. Industrial Stocks (XLI) down -6.79%


That’s precisely what you should see in #Quad4. Mr. Market is telling you that both growth and inflation expectations are slowing, at the same time. Unless you are overweight Cash, Treasury Bonds, and Munis, that is not #nice portfolio behavior.


Our immediate-term Global Macro Risk Ranges are now:


UST 10yr yield 2.20-2.39%


RUT 1042-1081

VIX 17.78-24.98
USD 84.99-86.64

Gold 1211-1241


Best of luck out there today,



#Nice Behavior - 10.14.14 Volume vs. Russell PEs

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